Recent Developments
1. In the LAC region, growth is moderating after reaching a 24-year high in 2004. (Figure 26) Nonetheless, projected growth rates of about 4 percent in 2005 and 3¾ percent in 2006 are still well above historical averages. Recent growth performance has been supported by the continued strength of global commodity and raw material prices that have boosted terms of trade and exports receipts. Mexico and countries in South America have gained, in particular, from the surge in fuel, food, and metals prices, and have generally been able to exploit these opportunities by expanding volumes-in some cases very substantially. Domestic demand has also generally remained robust (showing renewed strength recently in Brazil), and investment ratios are nearing, on average, a relatively high 20 percent of GDP, although some countries are beginning to face capacity constraints after their strong recoveries (Argentina, Uruguay).
2. A strengthening of policies and improved confidence have been reflected in exchange rate appreciations since mid-2004. For six large countries in the region (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), the nominal effective rate rose by an average of about 9 percent since the beginning of 2005 (based on data through end-July), with a larger increase in Brazil (24 percent), without significantly affecting exports. At the same time, reserves have continued to rise; for example, in Argentina, they are approaching US$26 billion, some nine months of imports of goods and services, and in Peru, reserves are more than 270 percent of maturing short-term external debt. Reserve accumulation in the region reflects current account surpluses and the renewed strength of investor sentiment toward the region, but in some cases the effo ...